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Betrayal of trust

THE UTI DECISION to suspend sale and repurchase in its flagship US-64 comes as a nasty shock for millions of retail investors.

Their stock of units is now hopelessly illiquid. The circumstances surrounding the decision -- a negative net worth -- is at least three years old although the management continued to mask the stark reality by announcing sale and repurchase prices far hi gher than the net asset value. To compound matters, there is no indication still, of the pricing method that would be adopted when the scheme is re-opened for sale/repurchase. Most galling is that `smart money', or corporate funds, seems to have had an i nkling of what was coming. This is evidenced by the big outflows, of around Rs 4,100 crore, in April-May. This unprecedented bunching of outflows indicates there is perhaps more than what meets the eye. The possibility of any malpractice is something for the Government and SEBI to look at.

At one level, the suspension of the repurchase window can be seen as protecting the interests of investors who would stay on as opposed to those who exit at unrealistic repurchase prices. It would even be a welcome move if the exercise is part of a credi ble, transparent programme to set the house in order. However, given the UTI's track record, one has to look with scepticism at any such possibility. The six-month time frame is also extremely short given the portfolio's large exposure to a couple of sto cks and an illiquid and poor quality corporate debt flow. The UTI has shown a marked reluctance to cut exposure in some stocks and this will not help. Had the move to stop sales and repurchases come two-three years ago, when the troubles first became off icially public, the UTI may have had a better chance of improving its situation. Now, the major systemic changes in the secondary market would also make any meaningful restructuring difficult and costly. It is also quite likely that `if' and when the UTI opens the repurchase window in 2001-02, there will be sizeable downward revision in the repurchase price heaping more losses on investors. And when the move to an NAV-based system is made, there may be further value depletion unless a second bail-out pa ckage is put together by the Government to ensure that investors do not suffer a loss.

By suspending repurchase now, the UTI may also have pressed the panic button; it may have merely postponed a run on the fund. The only way this can be avoided is by showing solid improvement in performance. This is a big `if' considering the state of the market, the economy and the UTI's track record of fund management. The only comfort from a larger perspective is that with the sales window closed, new investors will not be sucked into the black hole. The events also have to be seen in the light of the fact that the UTI has had limited success in re-orienting the scheme's portfolio in line with the investment objectives. Till a few months back, it had been touting security, safety, regular income and any-time liquidity to draw in more funds. Hopefully , as a consequence of this second officially admitted trouble, which has now hit investors hard by cutting off liquidity, the latter are unlikely to buy the flawed `unique selling points'.

On the liquidity aspect, the listing on the National Stock Exchange, cited by the UTI brass, is likely to be of marginal benefit to investors. The least the UTI could have done is start disclosing the NAV, which would have opened a borrowing mechanism fo r investors who were willing to take a big cut in value and also pay interest cost. By its stodgy unwillingness to declare the NAV, the UTI has closed even this prospect. In fact, by even moving to a straight NAV-based sale/repurchase system, the UTI may have done better by its investors. The continuing mess in US-64 -- with a dividend yield of just 7.4 per cent in 2001-02 -- even after a bail-out in 1998-99 and the insipid performance of its other schemes, points to the clear need for a complete overha ul of the UTI. This is necessary if it is to remain a credible player in the mutual fund business.